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C. Jones, H. Mo, T. Wang – “Does Private Information from Options Markets Forecast Aggregate Stock Returns?”

C. Jones, H. Mo, T. Wang – “Does Private Information from Options Markets Forecast Aggregate Stock Returns?”

Abstract: In this paper, we show that the difference between the implied volatilities of call and put options on individual equities has strong predictive power for aggregate stock market returns. This predictability is inconsistent with a rational risk premia or liquidity-based explanation. It is, however, consistent with the implied volatility spread capturing private information, based on its ability to forecast future cash flow growth and discount rate shocks.